Low CPI outlook lifts stocks, weighs on USD

BY Janne Muta

|July 12, 2023

Equities rallied and the dollar kept on losing ground in yesterday’s trading. Today’s US CPI could in theory change these dynamics but in practice, the chances of this happening are pretty low. US inflation is widely expected to come in lower than a month ago and the Fed Funds Futures traders are pricing in a 92.4% probability for a 25 bp rate hike and then no hikes for the rest of the year.

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The June y/y inflation rate is expected to have decelerated to 3.1%, marking the 12th consecutive month of declines and the lowest reading since March 2021. This slowdown is partly due to the high base effect from the previous year but it is expected that the inflation rate for rent has slowed, and prices for used cars are projected to decrease. The core inflation, (excludes volatile food and energy prices), is expected to decline to 5%, the lowest since November 2021 (5.3% in May).

What could change the future inflation readings though is the price of oil. The energy sector rallied 2.2% yesterday helping the S&P 500 to gain 0.64%. The reason: The rallying price of oil. The oil market is responding to the production cuts by Saudi Arabia and Russia. If China starts to stimulate its economy, the price of oil is likely to keep on appreciating. The higher oil price will eventually show in the inflation numbers and could then impact the Fed and the market expectations on what the Fed is likely to do.

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DAX remains in a short-term uptrend and is bullish above 15 708. Below the level, the market could move down to 15 640. The market is reacting higher after it broke some key supports last week and has created a lower reactionary high (16 209) and a lower low since the June peak (16 428). This is why, there’s a risk that this rally could eventually fail. If there’s another lower reactionary high below 16 209 we might see a deeper retracement in the weekly uptrend. However, as long as the upside momentum lasts there are opportunities on the long side.

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FTSE has been relatively weak over the last two days. The market has barely reacted higher even though the other indices we follow indices have rallied nicely. Usually, a market that’s much weaker than the others sells off when/if there’s again weakness in the others. Alternatively, if the others keep on pushing higher relatively weak markets tend to eventually follow the others. FTSE needs to break decisively above 7306 which could open the way to 7370 and then possibly to 7400. Alternatively, the pressure builds against the weekly support level at 7200.

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USDJPY remains in a downtrend and is bearish below 141.00. Above the level, the market might move to 141.90. The next major support level below the market price at the time of writing this is at 138.43.

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EURUSD has been rallying higher for four consecutive days. The market remains bullish above 1.1000. Below the level, the market might trade down to 1.0960. Above the current market price, the nearest major resistance level is the May high at 1.1090.

The Next Main Risk Events

  • USD - CPI and Core CPI
  • CAD - BOC Overnight Rate
  • GBP - UK GDP
  • USD - PPI and Core PPI
  • USD - Prelim UoM Consumer Sentiment

For more information and details see the TIOmarkets economic calendar.

Trade Safe!

Janne Muta
Chief Market Analyst

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Janne Muta

Janne Muta is a seasoned market analyst and trading educator with a M.Sc. in Finance. His strategies integrate macroeconomics with technical analysis and he shares his knowledge with the trading community.

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